Originally published in Recent Developments in Taxation, July 2011
The hiatus of section of 45 of the Income Tax Act, No. 58 of 1962 (the Act) with effect from 3 June 2011 has been highlighted quite significantly in the press. This section of the Act deals with the tax-free transfer of assets within a group of companies. In an attempt to address the uproar, the National Treasury and the South African Revenue Service (the SARS) issued a joint media statement on 29 June 2011 (the media statement) in terms of which an accelerated process to provide certainty in respect of section 45 was announced.
Interested parties were invited to meet with National Treasury and the SARS with the aim of determining, "the characteristics of transactions that do not represent a potential threat to the tax base so that underlying principles or rules can be refined for a more targeted approach to be effective as soon as possible".
It is unclear at this stage how successful this consultation process proved to be as the information and feedback provided by those who came forward will be used to formulate the "rules" which will form part of the amended section 45.
The media statement advises that further opportunities for consultation will be provided before the final response document is published in mid-August.
Despite the media statement and the stated timeframes, there is still no clear indication on whether tax relief for intra-group transfers will be available within the near future. Unfortunately as a result of the "shotgun" approach by the National Treasury and the SARS, all taxpayers are affected, even if a taxpayer's intended transaction does not include any of the tainted elements sought to be prevented by the suspension.
Members of Werksmans Tax Practice have provided the National Treasury with comments on this issue, and remain of the view that any new policy should be adopted in phases so as to avoid prejudicing parties who have bona fide structured their affairs in accordance with the section as it stands.
The fact that there might be perceived abuse in an intra-group transaction under section 45, is merely a symptom of an underlying gap in the Act itself. Our tax system is becoming increasingly sophisticated, and the current year's amendments add to that sophistication.
There are two basic areas in which our tax system woefully lags behind other sophisticated tax systems. They are, in no small measure, the reason for all the complex restructurings undertaken and include:
The need to allow a deduction for interest on debt raised to acquire a business by buying its shares (i.e.: where a business is acquired, not by acquiring the business itself but rather by acquiring the shares in the company as a whole).
The delay in implementing group taxation - a more holistic approach, of treating a group as an economic unit with intra-group transactions effectively being disregarded for tax purposes, is now urgently needed.
A reasonable and rational implementation of amendments to address these two areas would greatly reduce the need for complex, and in some cases artificial, structuring to achieve results which should be granted automatically in the law, and are to be found in most sophisticated tax systems.
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